New year, same old story as FCA lets bankers off hook by dropping review

The last serious scandal to squeeze into the news in 2015 doesn’t turn out to be Lynton “dog whistle” Crosby’s knighthood or other recipients of Dodgy Dave’s New Year honours list.

No, it’s the decision by Britain’s financial watchdog to drop its investigation into the UK’s banking culture.

This retreat from “banker bashing”, most of it well deserved since the crash of 2007-09, has been visible for a long time. But it has accelerated since the general election in May produced a slender Tory majority for president Cameron and his prime minister, George Osborne. It will come as some relief for the banking business, but not the rest of us.

Even Conservative MPs such as Mark Garnier, a member of the Treasury select committee, are disappointed by the decision of the Financial Conduct Authority to abandon its overall review in favour of “engaging individually” with major banks.

Though the news was not on the FCA website on Thursday morning, only in the Financial Times, we can all see what that probably means.

Most regulatory regimes in Britain, in the public and private sector, are susceptible to what economists call producer capture, whereby the regulator ends up, if not in bed with the industry it is targeting, then at least engaged in heavy petting.

Remember Dave Hartnett, famous for being Whitehall’s most wined and dined civil servant when he was the head of HMRC, which collects our taxes and sometimes doesn’t? He was what he liked to call non-confrontational in dealing with large tax avoiders – less so with the rest of us – and upon his retirement went to work for one or two of them.

Unlike his successor, Lin Homer, who seems to have been involved in a series of career train crashes on her way to the top, he didn’t even get a K, as Dame Lin does the women’s equivalent in the New Year honours, and instead was forced to settle for a measly Companionship of the Bath (CB). How bad can you be to endure such humiliation?

It is not easy to hold the big boys to account. They are led by aggressive alpha males, occasionally women (Carolyn McCall becomes a dame too, but at least she turned around easyJet), with battalions of overpaid lawyers and accountants. It takes steady nerves to stand up to their bullying, among officials and elected ministers, because the stakes can be high.

In this instance, the FCA was supposed to be seeing how well the supposedly chastened banks were doing in reforming their culture. That shift applied to pay and bonuses, promotion decisions among middle managers and the lack of workplace diversity in a pinstripe, sexist world. It was quite separate from tackling successive misjudgments (such as AAA-rated junk bonds) and scandals such as mis-sold consumer products and conspiracies to manipulate foreign exchange and bank rates.

In fairness to Osborne (he’s not really prime minister and my hunch is he never will be), he was tougher than Gordon Brown, squeezing more taxes and other impositions on the banks after they crashed the economy. But in last summer’s Mansion House speech, Osborne signalled a new “settlement” with the City, which included the de-facto sacking the FCA’s then chief executive, Martin Wheatley, possibly for being too critical of the banks, as the Guardian reported.

Wheatley had been brought in as an outsider from Hong Kong to give the bankers a kicking. But the Treasury was thought to have too much influence – as it does over so much – which may be why he’s not yet been replaced. Who would want a job they wouldn’t be allowed to do properly?

There are real difficulties getting the banks – retail and the investment/gambling sides of the business – to work more fairly and effectively for the wider society. The higher the level of reserves they are required to hold, the less they have to lend. The vast fines imposed for misconduct – even the FCA levied £1.5bn in 2014 (paywall) – adds to their burdens, though far too many have been levied on banks whose shareholders foot the bills, not on venal or incompetent individuals.

Back in 2013, the parliamentary commission on banking standards proposed that senior executives should be held responsible for misconduct by their staff, even if they had no direct knowledge of what they were up to. This was not long after bank chiefs assured ministers they would never again sign off on schemes they did not understand. Thanks to robust industry lobbying, the government is also backing away from that proposal.

In November, the FCA hit Barclays for £72m (paywall) over a dubious and secretive banking manoeuvre on behalf of a rich Middle Eastern client. But overall, the level of fines fell below £1bn in 2015, the first such decline since 2011, when the crisis was still in full flow and skeletons were falling out of the banks’ cupboards.

Yes, the industry has acquired its own Banking Standards Board, chaired by Dame Colette Bowe, another great Whitehall survivor – the Westland scandal in her case – who acknowledges that banks have lost public confidence. It recently issued its first annual report on bank culture. But as with most such internal regulation, the public is entitled to assume that a regulator with no power to punish will not put the fear of God into many people.

What’s more, retreat is an admission of weakness, a reminder to the big banks that they really may still be too big a part of the UK economy to be properly held to account, that threats to move elsewhere – such as Hong Kong or Singapore – are real, and that ministers’ bluff can be called. Alas, there is some truth in our painful over-dependency.

But it’s New Year’s Eve, so let’s end on a positive note.

News of the FCA’s retreat emerged on a quiet day, probably a calculated leak to bury bad news. But this is a matter for parliament, which is also in the business of holding governments to account. Let’s see how Jeremy Corbyn’s team, Tim Farron’s Liberal Democrats and the assorted nationalists do on this one. My hunch is that the cross-party Treasury select committee, chaired by the tough Tory MP Andrew Tyrie, is the best bet for causing a row. But here’s hoping.